Tax experts believe the government is unlikely to increase the standard deduction for salaried taxpayers in Budget 2026, despite growing concerns over rising urban living costs. The standard deduction serves as a crucial tax relief measure for salaried individuals and pensioners, allowing them to reduce taxable income without requiring investment or expense proof.

Current Standard Deduction Structure

The standard deduction varies between India's two tax regimes, providing different levels of relief to taxpayers:

Under the new tax regime, which is now the default option, the standard deduction represents one of the few remaining deductions available to salaried taxpayers as the system moves toward a simpler, exemption-light framework.

Expert Views on Policy Stability

Tax professionals emphasize that policy stability appears to be a key government consideration. Sudhakar Sethuraman, Partner at Deloitte India, noted that the standard deduction for salary income was recently enhanced to ₹75,000 in Finance Act 2024 as part of broader tax-relief measures. He explained that given relatively stable inflation and the policy intent of keeping the new regime simple and predictable, the government may prefer stability in the near term.

Location-Neutral Tax Approach

Experts argue that India's tax framework adopts a location-neutral approach, making deduction increases based on urban living costs unlikely. Neeraj Agarwala, Partner at Nangia & Co LLP, emphasized that tax laws are framed uniformly for the entire country and do not provide deductions based on geographic location, whether urban or rural.

"While the cost of living is undeniably higher in certain metropolitan cities, it remains significantly lower in many other regions. As a result, it is unlikely that the standard deduction would be revised solely to account for urban living costs," Agarwala stated.

Future Considerations

The standard deduction continues to serve as a key tax relief mechanism for salaried taxpayers under the new tax regime. However, any potential changes to the deduction amount will depend on several factors:

• Inflation trends and economic conditions
• Government financial position and revenue requirements
• Overall policy approach toward maintaining tax system simplicity
• Evolving income patterns and work realities

Experts suggest that decisions regarding residence and settlement, despite cost of living variations, remain matters of individual choice, reinforcing the government's uniform tax policy approach across different regions.

Markets are approaching Budget 2026 with measured expectations amid elevated geopolitical risks and uneven global growth, with investor focus firmly on policy clarity and taxation reforms. Rohit Agarwal, Executive Vice President and Senior Fund Manager at Kotak Mahindra Life Insurance, believes the upcoming budget may offer significant relief on capital gains taxation while creating opportunities for positive market surprises.

Budget 2026 Expectations and Tax Relief Prospects

The market is entering the budget cycle with measured expectations after experiencing muted returns in recent months, creating scope for positive policy developments. Following submissions made by foreign institutional investors regarding capital gains taxation complexity, there is a strong possibility that some relief may be considered in Budget 2026.

Foreign investors have argued that the current taxation method is overly complex, leading market participants to expect meaningful announcements addressing these concerns. The government is also expected to announce a glide path towards bringing the debt-to-GDP ratio below 50.00%.

December Quarter Earnings and Market Outlook

December quarter earnings are expected to show single-digit growth on a year-on-year basis, aligning with market expectations. Several sectors are experiencing positive sentiment due to improving demand following recent GST cuts. The rupee's depreciation is expected to provide temporary margin benefits for IT companies, though this advantage may diminish as pricing adjustments occur over time.

Geopolitical risks are likely to persist, already reflected in movements of gold and other safe-haven assets. The pending trade deal with the USA, delayed for various reasons, could continue to create market sentiment uncertainty in the near term.

Domestic SIP Flows and Currency Dynamics

Domestic SIP inflows have served as a crucial buffer against foreign sell-offs and are expected to maintain their steady rise throughout 2026. Investors are increasingly viewing SIPs as a long-term investment approach, with reduced churning and aggressive fund switching behavior.

The rupee at ₹90.00 has provided relief to exporters facing tariff pressures. On an inflation-adjusted basis, the Indian rupee appears undervalued against the US dollar, with expectations of partial correction once the trade deal materializes.

Sectoral Recommendations and Banking Focus

Private sector banks are positioned to perform well in 2026 as they shift focus back to growth with the rate cut cycle nearing completion. During the declining interest rate environment of recent periods, NBFCs held advantages as their liabilities repriced faster while many loans remained at fixed rates, supporting margins.

With one more rate cut expected in February or April, private banks are likely to deliver mid-teen operating profit growth as margins near the end of their decline phase.

Economic Growth Projections

The Indian government has projected economic growth of 7.40% for fiscal 2025-26, with nominal GDP expected to grow by 8.00% in the current fiscal against 9.70% last year. Despite geopolitical concerns and trade tensions, India should maintain growth of around 6.00% to 7.00%. Government initiatives including large GST rate cuts have begun reviving demand, while RBI's liquidity support has moved the banking system to a surplus position, helping credit growth increase by 200-300 basis points from below 10.00%.